Indian industrial production growth slowed sharply in December, its slowest pace in two months, adding to pressure on the Reserve Bank of India (RBI) to start cutting interest rates to help stimulate an economy that is headed for its slowest growth in three years.

Output from India's factories, mines and utilities increased a lower-than-expected 1.8 per cent in the month from a year earlier, government data showed on Friday.

Analysts on average had expected a rise of 3.4 per cent, a Reuters poll showed. The December figure compares with November's increase of 5.95 per cent.

Government bond yields slipped, stock prices turned negative and the rupee eased after the data was released.

"I do not despair. I believe that in the month of January, February and March, there could be a revival," Prime Minister's Economic Advisory Council's Chairman C. Rangarajan told news channel CNBC-TV18 after the data release.

With the cash-strapped government left with little fiscal headroom to encourage growth, the onus is on the Reserve Bank of India (RBI) to prop up the economy by cutting lending rates. The bank's next policy meeting is on March 15.

The notoriously volatile data came days after the government cut its economic growth forecast to a three-year low of 6.9 per cent for the fiscal year that ends in March.

Manufacturing output, which constitutes about 76 per cent of industrial production, rose 1.8 per cent from a year earlier, the federal statistics office said.

During April-December, industrial production expanded 3.6 per cent. Output grew 7.8 per cent in the 2010/11 fiscal year that ended in March, below the 10.5 per cent clocked the year before.

Growth in the Indian economy, which grew 8.4 per cent in the year to March 2011, has been slowing as the euro zone crisis, the central bank's tight monetary policy, and government policy paralysis discourages investment.